Five areas at risk in a trade dispute between U.S. and China
Everything from farm crops to computers could be affected, Jonathan Ratner writes.
The rapidly escalating trade dispute between the U.S. and China taken its toll on equity investors around the globe.
Following U.S. President Donald Trump’s imposition of up to US$60 billion in tariffs on Chinese goods, Beijing quickly responded with US$3 billion in levies on U.S. imports of select items such as pork, fruit, wine, soybeans, steel pipes and recycled aluminum.
However, it may not be the size of the tariffs that markets are most worried about, but rather the response itself, which suggests more retaliation is coming.
“I’m not sure many Chinese have read the Art of the Deal,” said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, referring to U.S. President Donald Trump’s best-selling memoir and business book. “No doubt, the President campaigned on protectionism, but so many of his supporters thought this was mere rhetoric. But it is now policy, aimed at supporting his Rust Belt Base, and for those of us in the investment community, this represents a new source of market uncertainty.”
Given the level of integration between the two countries, any number of industries, from aircraft to agriculture, could get caught in the crossfire.
With that in mind, here’s a look at some of the stocks and sectors that may be most vulnerable as the trade dispute heats up.
BOEING CO.
While Boeing already has had a much-publicized trade spat going on with Canada’s Bombardier Inc., and has been subject to Twitter threats by Trump, a trade dispute with China could end up being far more damaging.
Boeing received a US$38 billion order from China in 2015, but the country has already warned that it could give its business to rival Airbus if the U.S. raised levies.
The company’s sales in China were almost US$12 billion, or approximately 13 per cent of its total.
AGRICULTURE
Soybeans and sorghum are the two soft commodities most dependent on China, as U.S. soybean exports are expected to represent 47 per cent of U.S. production in 2017-2018. China was also the top destination for U.S. soybeans at more than 60 per cent of total exports.
U.S. exports of sorghum (a grass species cultivated for its grain that is used in food for humans, animal feed, and ethanol production) are expected to represent 67 per cent of U.S. production, and China represented 88 per cent of U.S. exports in 2016-2017.
“China does not necessarily need to impose a tariff on U.S. soft commodities to wreak havoc on the industry,” said Ann Duignan, an analyst at J.P. Morgan.
Instead, it could simply draw down its current inventories and/or source from other regions, since the world has plenty of supply of all major crops.
Duignan believes U.S. farmers would be among the likely losers in this scenario, with equipment suppliers such as Deere & Co., CNH Industrial NV, and to a lesser extent AGCO Corp. all considered vulnerable.
APPLE INC.
Twenty per cent of Apple’s revenue, or US$18 billion, came from the Chinese market in the most recent quarter, making it an increasingly important part of its business.
Like many American-branded products, the company uses global suppliers for its parts, but iPhones and iPads are put together in China.
IHS Markit estimates that contract manufacturers in China, including Foxconn, represent just three to six per cent of the manufacturing cost of the iPhone X. However, current trade statistics count most of the manufacturing cost in China’s export numbers.
Since Apple and other U.S. companies like Intel and Qualcomm use global supply chains to manufacture products in China, other economies could be caught up in a trade war.
“That is an important reason why U.S.-China trade friction will cause ‘collateral damage,’ especially in other Asian economies,” said Louis Kuijs, head of Asia economics research at Oxford Economics.
NIKE INC.
The world’s largest footwear maker continues to grapple with a slowdown in its North American business, but it’s having a lot of success in China. Nike’s sales in China rose 24 per cent to US$1.34 billion in the third quarter, and it hopes for more of the same as it rolls out the NikePlus membership program in the coming months.
“Nike’s Consumer Direct Offense drove strong double-digit growth across our international geographies, led by Greater China,” said chief executive Mark Parker.
However, with China accounting for 15 per cent of Nike’s total revenue, any disruption to its plans there could cause a big dent in its growth.
Nike and rival Under Armour have expressed their concerns about the negative impact tariffs could have on U.S. consumers, but further retaliation could also hinder its efforts to lure in more Chinese shoppers.
FACEBOOK INC.
The social media network would love to get a piece of the Chinese market, but it has been banned since 2009, and the current trade dispute — coupled with Facebook’s ongoing privacy woes — won’t help its chances.
The company’s founder and CEO, Mark Zuckerberg, wants Facebook unblocked in China, and has visited the country several times, including meetings with President Xi Jinping.
But until the company sorts out its existing problems, most notably the data breach that saw the data of 50 million get into the hands of political consultancy Cambridge Analytica, its pursuits in China may have to wait.
“We think this issue is more likely to snowball than recede and that advertisers are reaching a tipping point at which spending on not only Facebook and other online platforms, is re-evaluated,” London-based brokerage Liberum Capital told clients this week.